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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the Quarterly Period Ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ______________ to _________________
Commission file number 000-20793
SMITHWAY MOTOR XPRESS CORP.
(Exact name of registrant as specified in its charter)
Nevada 42-1433844
- --------------------------------- -----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2031 Quail Avenue
Fort Dodge, Iowa 50501
- --------------------------------- -----------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 515/576-7418
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
As of October 31, 2003, the registrant had 3,846,821 shares of Class A Common
Stock and 1,000,000 shares of Class B Common Stock outstanding.
1
PART I
FINANCIAL INFORMATION
PAGE
NUMBER
Item 1 Financial Statements 3-10
Condensed Consolidated Balance Sheets as of December 31, 2002 and
September 30, 2003 (unaudited)................................... 3-4
Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 2002 and 2003 (unaudited).............. 5
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2002 and 2003 (unaudited).............. 6-7
Notes to Condensed Consolidated Financial Statements (unaudited)......... 8-10
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 11-20
Item 3 Quantitative and Qualitative Disclosures About Market Risk............... 20
Item 4 Controls and Procedures.................................................. 20
PART II
OTHER INFORMATION
Item 1 Legal Proceedings........................................................ 21
Item 2 Changes in Securities and Use of Proceeds................................ 21
Item 3 Defaults Upon Senior Securities.......................................... 21
Item 4 Submission of Matters to a Vote of Security Holders...................... 21
Item 5 Other Information........................................................ 21
Item 6 Exhibits and Reports on Form 8-K......................................... 22
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
(unaudited)
------------------------------------------
December 31, September 30,
2002 2003
--------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 105 $ 169
Receivables:
Trade............................................... 13,496 15,590
Other............................................... 629 804
Inventories............................................ 868 1,029
Deposits, primarily with insurers...................... 753 928
Prepaid expenses....................................... 1,492 1,664
Deferred income taxes.................................. 2,263 2,313
--------------------- -------------------
Total current assets............................... 19,606 22,497
--------------------- -------------------
Property and equipment:
Land................................................... 1,548 1,548
Buildings and improvements............................. 8,210 8,208
Tractors............................................... 71,221 69,727
Trailers............................................... 42,517 40,414
Other equipment........................................ 8,105 5,588
--------------------- -------------------
131,601 125,485
Less accumulated depreciation.......................... 64,031 67,646
Net property and equipment......................... 67,570 57,839
--------------------- -------------------
Goodwill................................................. 1,745 1,745
Other assets............................................. 488 237
--------------------- -------------------
$ 89,409 $ 82,318
===================== ===================
See accompanying notes to condensed consolidated financial statements.
3
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
(unaudited)
--------------------------------------------
December 31, September 30,
2002 2003
---------------------- ---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt................. $ 11,595 $ 11,197
Accounts payable..................................... 4,556 6,152
Accrued loss reserves................................ 3,882 4,972
Accrued compensation................................. 2,152 2,784
Checks in excess of cash balances.................... 1,086 1,310
Other accrued expenses............................... 463 439
---------------------- ---------------------
Total current liabilities...................... 23,734 26,854
Long-term debt, less current maturities................ 30,533 24,951
Deferred income taxes.................................. 10,257 9,063
Line of credit......................................... 1,692 578
---------------------- ---------------------
Total liabilities.............................. 66,216 61,446
---------------------- ---------------------
Stockholders' equity:
Preferred stock...................................... - -
Common stock:
Class A............................................ 40 40
Class B............................................ 10 10
Additional paid-in capital........................... 11,393 11,393
Retained earnings.................................... 12,164 9,843
Reacquired shares, at cost........................... (414) (414)
---------------------- ---------------------
Total stockholders' equity................. 23,193 20,872
Commitments
---------------------- ---------------------
$ 89,409 $ 82,318
====================== =====================
See accompanying notes to condensed consolidated financial statements.
4
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------------------
2002 2003 2002 2003
---------------- -------------- ---------------- --------------
Operating revenue:
Freight................................. $ 43,132 $ 42,325 $ 129,232 $ 124,056
Other................................... 140 136 499 532
---------------- -------------- ---------------- --------------
Operating revenue.................... 43,272 42,461 129,731 124,588
---------------- -------------- ---------------- --------------
Operating expenses:
Purchased transportation................ 16,192 13,891 48,034 42,590
Compensation and employee benefits...... 12,138 12,885 39,282 37,912
Fuel, supplies, and maintenance......... 6,929 7,420 20,436 22,351
Insurance and claims.................... 1,620 1,670 5,072 4,168
Taxes and licenses...................... 872 893 2,628 2,573
General and administrative.............. 1,708 1,867 5,445 5,081
Communications and utilities............ 418 337 1,357 1,130
Depreciation and amortization........... 4,043 3,467 12,088 10,958
---------------- -------------- ---------------- --------------
Total operating expenses............. 43,920 42,430 134,342 126,763
---------------- -------------- ---------------- --------------
Income (loss) from operations........ (648) 31 (4,611) (2,175)
Financial (expense) income
Interest expense........................ (497) (443) (1,582) (1,389)
Interest income......................... 5 21 22 25
---------------- -------------- ---------------- --------------
Loss before income taxes............. (1,140) (391) (6,171) (3,539)
Income tax benefit........................... (383) (86) (2,216) (1,218)
---------------- -------------- ---------------- --------------
Net loss............................. $ (757) $ (305) $ (3,955) $ (2,321)
================ ============== ================ ==============
Basic and diluted loss per share............. $ (0.16) $ (0.06) $ (0.82) $ (0.48)
================ ============== ================ ==============
Basic and diluted weighted average shares
outstanding.................................. 4,846,021 4,846,821 4,845,528 4,846,821
================ ============== ================ ==============
See accompanying notes to condensed consolidated financial statements.
5
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
Nine months ended
September 30,
------------------------------
2002 2003
-------------- --------------
Cash flows from operating activities:
Net loss......................................................... $ (3,955) $ (2,321)
-------------- --------------
Adjustments to reconcile net loss to cash used by operating
activities:
Depreciation and amortization.................................. 12,088 10,958
Deferred income tax benefit.................................... (2,236) (1,244)
Change in:
Receivables................................................. (1,622) (2,269)
Inventories................................................. 490 (161)
Deposits, primarily with insurers........................... (212) (175)
Prepaid expenses............................................ (741) (172)
Accounts payable and other accrued liabilities.............. 2,754 3,294
-------------- --------------
Total adjustments......................................... 10,521 10,231
-------------- --------------
Net cash provided by operating activities............... 6,566 7,910
-------------- --------------
Cash flows from investing activities:
Purchase of property and equipment............................... (1,076) (287)
Proceeds from sale of property and equipment..................... 4,064 2,765
Other............................................................ 42 251
-------------- --------------
Net cash provided by investing activities................... 3,030 2,729
-------------- --------------
Cash flows from financing activities:
Net borrowings (payments) on line of credit...................... 2,221 (1,114)
Principal payments on long-term debt............................. (11,893) (9,685)
Change in checks issued in excess of cash balances............... - 224
Treasury stock reissued.......................................... 6 -
-------------- --------------
Net cash used in financing activities....................... (9,666) (10,575)
-------------- --------------
Net (decrease) increase in cash and cash equivalents........ (70) 64
Cash and cash equivalents at beginning of period................... 722 105
-------------- --------------
Cash and cash equivalents at end of period......................... $ 652 $ 169
============== ==============
See accompanying notes to condensed consolidated financial statements.
6
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows, continued
(Dollars in thousands)
(unaudited)
Nine months ended
September 30,
------------------------------
2002 2003
-------------- --------------
Supplemental disclosure of cash flow information:
Cash paid (received) during period for:
Interest...................................................... $ 1,621 $ 1,353
Income taxes.................................................. (1,794) 23
============== ==============
Supplemental schedules of noncash investing and financing
activities:
Notes payable issued for tractors and trailers..................... $ 4,671 $ 3,705
============== ==============
See accompanying notes to condensed consolidated financial statements.
7
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The condensed consolidated financial statements include the accounts of
Smithway Motor Xpress Corp., a Nevada holding company, and its four wholly
owned subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
The condensed consolidated financial statements have been prepared, without
audit, in accordance with accounting principles generally accepted in the
United States of America, pursuant to the published rules and regulations
of the Securities and Exchange Commission. In the opinion of management,
the accompanying condensed consolidated financial statements include all
adjustments which are necessary for a fair presentation of the results for
the interim periods presented, such adjustments being of a normal recurring
nature. Certain information and footnote disclosures have been condensed or
omitted pursuant to such rules and regulations. The December 31, 2002,
Condensed Consolidated Balance Sheet was derived from the audited balance
sheet of the Company for the year then ended. It is suggested that these
condensed consolidated financial statements and notes thereto be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the year ended December 31, 2002.
Results of operations in interim periods are not necessarily indicative of
results to be expected for a full year.
Note 2. Liquidity
The Company incurred significant losses in 2001 and 2002, and has continued
to incur losses in the first three quarters of 2003. In addition, working
capital is a negative $4,128 and $4,357 at December 31, 2002 and September
30, 2003, respectively. The Company was in violation of its bank covenants
at various times during the three months and nine months ended September
30, 2003, but has received waivers. Since the beginning of 2003, there have
been several amendments to the financing arrangement. These amendments have
decreased the maximum loan limit, increased the interest rate, and revised
the financial covenants to reflect financial performance that management
believed to be reasonably achievable, although in each case further
amendments have been required and there can be no assurance that the
required financial performance will be achieved in the future.
During 2002, the Company's primary sources of liquidity were funds provided
by operations and borrowings under credit arrangements with financial
institutions and equipment manufacturers. The Company is experiencing a
period of minimal cash flow as continuing losses and declining revenue have
resulted in lower cash generated from operations and reduced borrowing
capacity. As of the date of this report, management believes that the
Company has adequate borrowing availability on its line of credit. The
Company expects minimal capital expenditures during the remainder of 2003.
The Company's ability to fund its cash requirements in future periods will
depend on its ability to comply with covenants contained in financing
arrangements and improve its operating results and cash flow. The Company's
ability to achieve the required improvements will depend on general
shipping demand of the Company's customers, fuel prices, the availability
of drivers and independent contractors, insurance and claims experience,
and other factors. Management is in the process of implementing several
steps intended to return the Company to profitability, some of which were
developed with the assistance of a consulting firm engaged by the board of
directors, that are intended to improve the Company's operating results and
achieve compliance with the financial covenants. These steps include:
consolidating terminals; improving the utilization per tractor through the
hiring of a full-time production manager; implementing a yield management
program in which the Company seeks additional favorable freight while
ceasing to haul less favorable freight; and identifying additional areas
for cost containment, including, personnel costs and reducing the Company's
excess insurance coverage limit effective July 1, 2003 to $2.0 million.
Although management believes these steps have helped reduce the Company's
losses compared with the same quarter and nine months in 2002, additional
improvement is needed, and particularly considering seasonally slower
shipping demand during the fourth and first quarters, there is no assurance
that the improvements will occur as planned.
Although there can be no assurance, management believes that cash generated
by operations and available sources of financing for acquisitions of
revenue equipment, although such sources are limited, will be adequate to
meet its currently anticipated working capital requirements and other cash
needs through September 30, 2004. To
8
the extent that actual results or events differ from management's financial
projections or business plans, the Company's liquidity may be adversely
affected. Specifically, the Company's liquidity may be adversely affected
by one or more of the following factors: continuing weak freight demand or
a loss in customer relationships or volume; the ability to attract and
retain sufficient numbers of qualified drivers and owner-operators;
elevated fuel prices and the ability to collect fuel surcharges; costs
associated with insurance and claims; increased exposure with respect to
accident claims as a result of a reduction of the Company's excess
insurance coverage limit; inability to maintain compliance with, or
negotiate amendments to, loan covenants; and the possibility of shortened
payment terms by the Company's suppliers and vendors worried about the
Company's ability to meet payment obligations. The Company expects to fund
its cash requirements primarily with cash generated from operations and
revolving borrowings under its bank financing.
Note 3. Net earnings per common share
Basic earnings per share have been computed by dividing net earnings by the
weighted average outstanding Class A and Class B common shares during each
of the quarters. Diluted earnings per share have been calculated by also
including in the computation the effect of employee stock options,
nonvested stock, and similar equity instruments granted to employees as
potential common shares. Because the Company suffered a net loss for the
three months and nine months ended September 30, 2002, and 2003, the
effects of potential common shares were not included in the calculation as
their effects would be anti-dilutive. Stock options outstanding at
September 30, 2002, and 2003, totaled 594,525 and 299,150, respectively.
Note 4. Stock Option Plans
The Company has three stock-based employee compensation plans:
(1) The Company has reserved 25,000 shares of Class A common stock for
issuance pursuant to an outside director stock option plan. The term of
each option granted under this plan is six years from the grant date.
Options fully vest on the first anniversary of the grant date. The
exercise price of each stock option is 85 percent of the fair market
value of the common stock on the date of grant. In July 2000 the Company
granted outside directors 12,000 stock options in the aggregate not
covered by this plan.
(2) The Company has reserved 500,000 shares of Class A common stock for
issuance pursuant to an incentive stock option plan. Any shares which
expire unexercised or are forfeited become available again for issuance
under the plan. Under this plan, no awards of incentive stock options
may be made after December 31, 2004.
(3) The Company has reserved 400,000 shares of Class A common stock for
issuance pursuant to a new employee incentive stock option plan adopted
during 2001. Any shares which expire unexercised or are forfeited become
available again for issuance under the plan. Under this plan, no award
of incentive stock options may be made after August 6, 2011.
The Company accounts for these plans under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. No stock-based
employee compensation cost is reflected in the statement of operations, as
all options granted to employees under these plans had an exercise price
equal to the market value of the common stock on the date of the grant.
9
The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation. The Company used the Black-Scholes
option pricing model to determine the fair value of stock options for the
three and nine months ended September 30, 2002, and 2003. The following
assumptions were used in determining the fair value of these options:
weighted average risk-free interest rate, 4.55% in 2002 and 2.54% in 2003;
weighted average expected life, 5 years in 2002 and 2003; and weighted
average expected volatility, 61% in 2002, , and 66% in 2003. There were no
expected dividends. For purposes of pro forma disclosures, the estimated
fair value of options is amortized to expense over the options' vesting
periods.
Three months ended Nine months ended
September 30, September 30,
---------------------------- -----------------------------
2002 2003 2002 2003
----------- ------------ ------------ ------------
Net loss, as reported $ (757) $ (305) $(3,955) $(2,321)
Deduct: Total stock-based
employee compensation expense
determined under fair value based
method for all awards, net of related
tax effects (1) (4) (4) (13)
----------- ------------ ------------ ------------
Pro forma net loss $ (758) $ (309) $(3,959) $(2,334)
=========== ============ ============ ============
Loss per share
Basic and Diluted - as reported $ (0.16) $ (0.06) $ (0.82) $ (0.48)
Basic and Diluted - pro forma $ (0.16) $ (0.06) $ (0.82) $ (0.48)
Note 5. Long-Term Debt
During November 2003, the Company amended its financing arrangement with
LaSalle Bank. The Company was not in compliance with the fixed charge
coverage ratio requirement at September 30, 2003. The November 2003
amendment revised the fixed charge coverage ratio requirement as of
September 30, 2003 to prevent a covenant violation at such date, extended
the expiration date of the agreement to January 1, 2005, adjusted the
covenant requirements going forward, and reduced the maximum loan limit
from $27,500 to $25,000. In addition, the Company amended its equipment
financing arrangement to provide for adjustment of the tangible net worth
requirement going forward. The Company believes the covenant compliance
requirements for its financing agreements are reasonably achievable,
although there can be no assurance that the required financial performance
will be achieved.
During July 2003, the Company amended its financing arrangement with
LaSalle Bank. This amendment waived the covenant violation for the quarter
ended June 30, 2003 and also as of July 31, 2003. The amendment also
extended the expiration date of the agreement to July 1, 2004 and reduced
the maximum loan limit from $32,500 to $27,500.
During March and April 2003, the Company amended its financing arrangement
with LaSalle Bank. These amendments waived covenant violation at March 31,
2003, adjusted the covenant requirements going forward, increased the
interest rate from LaSalle's prime rate to prime rate plus two percent, and
accelerated the expiration date of the agreement to April 1, 2004. In
addition, the Company amended its equipment financing arrangement to
provide for a waiver of a covenant violation at March 31, 2003, and the
adjustment of the covenant requirement going forward.
Note 6. Related Party Transactions
In August 2003, the Company generated approximately $213 of cash and
avoided future premium payments by selling one of its two life insurance
policies covering its Chief Executive Officer to such officer for the cash
surrender value. The transferred policy has a death benefit of $1,000 and
the policy retained by the Company has a death benefit of $750. The
transaction was approved by the disinterested directors.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Except for the historical information contained herein, the discussion
in this quarterly report on Form 10-Q contains forward-looking statements that
involve risk, assumptions, and uncertainties that are difficult to predict.
Words such as "anticipates," "believes," "estimates," "projects," "expects,"
variations of these words, and similar expressions, are intended to identify
such forward-looking statements. These statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
statements are based upon the current beliefs and expectations of the Company's
management and are subject to significant risks and uncertainties. Actual
results may differ from those set forth in forward-looking statements. The
following factors, among others, could cause actual results to differ materially
from those in forward-looking statements: failure to turn around continued
operating losses, which could result in further violation of bank covenants and
acceleration of indebtedness at several financial institutions; the ability to
obtain financing on acceptable terms, and obtain waivers and amendments to
current financing in the event of default; economic recessions or downturns in
customers' business cycles; excessive increases in capacity within truckload
markets; surplus inventories; decreased demand for transportation services
offered by the Company; increases or rapid fluctuations in inflation, interest
rates, fuel prices, and fuel hedging; the availability and costs of attracting
and retaining qualified drivers and owner-operators; increases in insurance
premiums and deductible amounts, or changes in excess coverage, relating to
accident, cargo, workers' compensation, health, and other claims; increased
exposure with respect to accident claims as a result of a reduction of the
Company's excess insurance coverage limit; the resale value of used equipment
and prices of new equipment; seasonal factors such as harsh weather conditions
that increase operating costs; regulatory requirements that increase costs and
decrease efficiency, including revised hours-of-service requirements for
drivers; changes in management; and the ability to negotiate, consummate, and
integrate acquisitions. Readers should review and consider the various
disclosures made by the Company in its press releases, stockholder reports, and
public filings, as well as the factors explained in greater detail in the
Company's annual report on Form 10-K.
The Company's fiscal year ends on December 31 of each year. Thus, this
report discusses the third quarter and first nine months of the Company's 2002
and 2003 fiscal years.
For the three months ended September 30, 2003, operating revenue
decreased 1.9% to $42.5 million from $43.3 million during the same quarter in
2002. Net loss was $305,000, or ($0.06) per diluted share, compared with net
loss of $757,000, or ($0.16) per diluted share, during the 2002 quarter. For the
nine months ended September 30, 2003, operating revenue decreased 4.0% to $124.6
million from $129.7 million during the same period in 2002. Net loss was $2.3
million, or ($0.48) per diluted share, compared with net loss of $4.0 million,
or ($0.82) per diluted share, during the 2002 period.
The Company operates a tractor-trailer fleet comprised of both
Company-owned vehicles and vehicles obtained under leases from independent
contractors and third-party finance companies. Fluctuations among expense
categories may occur as a result of changes in the relative percentage of the
fleet obtained through equipment that is owned versus equipment that is leased
from independent contractors or financing sources. Costs associated with revenue
equipment acquired under operating leases or through agreements with independent
contractors are expensed as "purchased transportation." For these categories of
equipment the Company does not incur costs such as interest and depreciation as
it might with owned equipment. In addition, independent contractor tractors,
driver compensation, fuel, communications, and certain other expenses are borne
by the independent contractors and are not incurred by the Company. Obtaining
equipment from independent contractors and under operating leases reduces
capital expenditures and on-balance sheet leverage and effectively shifts
expenses from interest to "above the line" operating expenses. The fleet profile
of acquired companies and the Company's relative recruiting and retention
success with Company-employed drivers and independent contractors will cause
fluctuations from time-to-time in the percentage of the Company's fleet that is
owned versus obtained from independent contractors and under operating leases.
11
Results of Operations
The following table sets forth the percentage relationship of certain
items to revenue for the three and nine months ended September 30, 2002 and
2003:
Three months ended Nine months ended
September 30, September 30,
------------------------ -----------------------
2002 2003 2002 2003
----------- ----------- ---------- -----------
Operating revenue..................................... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Purchased transportation..................... 37.4 32.7 37.0 34.2
Compensation and employee benefits........... 28.1 30.3 30.3 30.4
Fuel, supplies, and maintenance.............. 16.0 17.5 15.8 17.9
Insurance and claims......................... 3.7 3.9 3.9 3.3
Taxes and licenses........................... 2.0 2.1 2.0 2.1
General and administrative................... 3.9 4.4 4.2 4.1
Communication and utilities.................. 1.0 0.8 1.0 0.9
Depreciation and amortization................ 9.3 8.2 9.3 8.8
----------- ----------- ---------- ----------
Total operating expenses..................... 101.5 99.9 103.6 101.7
----------- ----------- ---------- ----------
Income (Loss) from operations......................... (1.5) 0.1 (3.6) (1.7)
Interest expense, net................................. 1.1 1.0 1.2 1.1
----------- ----------- ---------- ----------
Loss before income taxes.............................. (2.6) (0.9) (4.8) (2.8)
Income tax benefit.................................... (0.9) (0.2) (1.7) (0.9)
----------- ----------- ---------- ----------
Net loss.............................................. (1.7)% (0.7)% (3.0)% (1.9)%
=========== =========== ========== ==========
Comparison of three months ended September 30, 2003, with three months ended
September 30, 2002.
Operating revenue decreased $811,000 (1.9%), to $42.5 million in the
2003 quarter from $43.3 million in the 2002 quarter. Lower weighted average
tractors, partially offset by increased average revenue per tractor per week and
increased fuel surcharge revenue, were responsible for the decrease in operating
revenue. Weighted average tractors decreased to 1,208 in the 2003 quarter from
1,359 in the 2002 quarter as the Company disposed of a portion of its unseated
company owned tractors and contracted with fewer independent contractor
providers of equipment. The Company does not plan to increase the number of
tractors in its fleet in the near term unless its number of independent
contractors increases. Average operating revenue per tractor per week increased
to $2,704 in the 2003 quarter from $2,449 in the 2002 quarter. Operating revenue
includes revenue from operating our trucks as well as other, more volatile,
revenue items, including fuel surcharge, brokerage, and other revenue. The
Company believes the analysis of tractor productivity is more meaningful if fuel
surcharge, brokerage, and other revenue are excluded from the computation.
Revenue per tractor per week (excluding fuel surcharge, brokerage, and other
revenue) increased to $2,495 in the 2003 quarter from $2,273 in the 2002
quarter, primarily due to increased production from our seated company tractors
and a lower number of unseated company tractors. Revenue per loaded mile
(excluding fuel surcharge, brokerage, and other revenue) increased to $1.39 in
the 2003 quarter from $1.38 in the 2002 quarter. Finally, fuel surcharge revenue
increased $399,000 to $1.3 million in the 2003 quarter from $942,000 in the 2002
quarter. During the 2003 and 2002 quarters, approximately $942,000 and $537,000,
respectively, of the fuel surcharge revenue collected helped to offset Company
fuel costs. The remainder was passed through to independent contractors.
Purchased transportation consists primarily of payments to independent
contractor providers of revenue equipment, expenses related to brokerage
activities, and payments under operating leases of revenue equipment. Purchased
transportation decreased $2.3 million (14.2%), to $13.9 million in the 2003
quarter from $16.2 million in the 2002 quarter. As a percentage of revenue,
purchased transportation decreased to 32.7% of revenue in the 2003 quarter
compared with 37.4% in the 2002 quarter. These changes reflect a decrease in the
percentage of the fleet supplied by independent contractors and in the number of
independent contractors. Management believes the decline in independent
contractors as a percentage of the Company's fleet is attributable to high fuel
costs, high insurance costs, tighter credit standards, and slow freight demand,
which have diminished the pool of drivers interested in becoming or remaining
independent contractors. The percentage of total operating revenue provided by
independent contractors decreased to 36.0% in the 2003 quarter from 40.7% in the
2002 quarter.
12
Compensation and employee benefits increased $746,000 (6.1%), to $12.9
million in the 2003 quarter from $12.1 million in the 2002 quarter. As a
percentage of revenue, compensation and employee benefits increased to 30.3% in
the 2003 quarter from 28.1% in the 2002 quarter reflecting an increase in the
percentage of the fleet comprised of company owned tractors, and higher fuel
prices, an increase in health and workers' compensation claims paid and
reserved, and additional wages paid to new drivers for sign-on bonuses
implemented to enhance driver recruiting. These factors were partially offset by
a decrease in wages paid to non-driver employees resulting from staff
reductions.
Fuel, supplies, and maintenance increased $491,000 (7.1%), to $7.4
million in the 2003 quarter from $6.9 million in the 2002 quarter. As a
percentage of revenue, fuel, supplies, and maintenance increased to 17.5% of
revenue in the 2003 quarter compared with 16.0% in the 2002 quarter. This
reflects an increase in the percentage of the fleet comprised of company owned
tractors and higher fuel prices. Although fuel prices increased approximately 7%
to an average of $1.39 per gallon in the 2003 quarter from $1.30 per gallon in
the 2002 quarter, the increase in fuel prices was partially offset by a $405,000
increase in fuel surcharge revenue which is included in operating revenue.
Insurance and claims increased $50,000 (3.1%), to $1.7 million in the
2003 quarter from $1.6 million in the 2002 quarter. As a percentage of revenue,
insurance and claims increased to 3.9% of revenue in the 2003 quarter from 3.7%
in the 2002 quarter. The Company's insurance coverage was renewed on July 1,
2003 without modification to the self-retention level ($250,000), but the
Company's excess insurance coverage limit was reduced to $2.0 million.
Management expects insurance and claims expense, as a percentage of revenue,
will remain at current levels in future periods unless the Company were to
experience an increase in the number or severity of accidents over the reduced
excess policy coverage limit, which could result in a substantial increase in
this expense category as a percentage of revenue.
Taxes and licenses increased $21,000 (2.4%), to $893,000 in the 2003
quarter from $872,000 in the 2002 quarter reflecting an increase in the need for
over-dimensional permits, partially offset by a decrease in the weighted average
number of tractors in the fleet. As a percentage of revenue, taxes and licenses
remained relatively constant at 2.1% of revenue in the 2003 quarter compared
with 2.0% in the 2002 quarter.
General and administrative expenses increased $159,000 (9.3%), to $1.9
million in the 2003 quarter from $1.7 million in the 2002 quarter. As a
percentage of revenue, general and administrative expenses increased to 4.4% of
revenue in the 2003 quarter compared with 3.9% of revenue in the 2002 quarter.
During the quarter, decreases attributable to successful cost cutting measures
and the elimination of commissioned agents at two locations were offset by a
$252,000 increase in professional and consulting fees.
Communications and utilities decreased $81,000 (19.4%), to $337,000 in
the 2003 quarter from $418,000 in the 2002 quarter reflecting a decrease in the
weighted average number of tractors in the fleet and the closing of five
operating terminals and two maintenance facilities. As a percentage of revenue,
communications and utilities decreased to 0.8% of revenue in the 2003 quarter
compared with 1.0% of revenue in the 2002 quarter.
Depreciation and amortization decreased $575,000 (14.2%), to $3.5
million in the 2003 quarter from $4.0 million in the 2002 quarter. The gain or
loss on retirement, sale, or write-down of equipment is included in depreciation
and amortization. In the 2003 and 2002 quarter, depreciation and amortization
included net gains from the sale of equipment of $76,000 and $88,000,
respectively. As a percentage of revenue, depreciation and amortization
decreased to 8.2% of revenue in the 2003 quarter compared with 9.3% of revenue
in the 2002 quarter because of higher revenue per seated tractor, which more
effectively spread this cost, and a decrease in the number of tractors and
trailers being depreciated.
Interest expense, net, decreased $69,000 (14.0%), to $423,000 in the
2003 quarter from $492,000 in the 2002 quarter reflecting lower average debt
outstanding, partially offset by higher interest rates. As a percentage of
revenue, interest expense, net, remained relatively constant at 1.0% of revenue
in the 2003 quarter compared with 1.1% of revenue in the 2002 quarter.
As a result of the foregoing, the Company's pre-tax margin was (0.9%)
in the 2003 quarter versus (2.6%) in the 2002 quarter.
The Company's income tax benefit in the 2003 quarter was $86,000, or
22.0% of loss before income taxes.
13
The Company's income tax benefit in the 2002 quarter was $383,000, or 33.6% of
loss before income taxes. In both quarters, the effective tax rate is different
from the expected combined tax rate for a company headquartered in Iowa because
of the cost of nondeductible driver per diem expense absorbed by the Company.
The impact of the Company's paying per diem travel expenses varies depending
upon the ratio of drivers to independent contractors and the level of the
Company's pre-tax earnings.
As a result of the factors described above, net loss was $305,000 in
the 2003 quarter (0.7% of revenue), compared with net loss of $757,000 in the
2002 quarter (1.7% of revenue).
Comparison of nine months ended September 30, 2003, with nine months ended
September 30, 2002.
Operating revenue decreased $5.1 million (4.0%), to $124.6 million in
the 2003 period from $129.7 million in the 2002 period. Lower weighted average
tractors, partially offset by increased average revenue per tractor per week and
increased fuel surcharge revenue, were responsible for the decrease in operating
revenue. Weighted average tractors decreased to 1,250 in the 2003 period from
1,447 in the 2002 period as the Company disposed of a portion of its unseated
company owned tractors and contracted with fewer independent contractor
providers of equipment. The Company does not plan to increase the number of
tractors in its fleet in the near term unless its number of independent
contractors increases. Average operating revenue per tractor per week increased
to $2,556 in the 2003 period from $2,299 in the 2002 period. Operating revenue
includes revenue from operating our trucks as well as other, more volatile,
revenue items, including fuel surcharge, brokerage, and other revenue. The
Company believes the analysis of tractor productivity is more meaningful if fuel
surcharge, brokerage, and other revenue are excluded from the computation.
Average revenue per tractor per week (excluding fuel surcharge, brokerage, and
other revenue) increased to $2,345 in the 2003 period from $2,157 in the 2002
period, primarily due to a lower number of unseated company tractors. Revenue
per loaded mile (excluding fuel surcharge, brokerage, and other revenue)
increased to $1.37 in the 2003 period from $1.36 in the 2002 period. Finally,
fuel surcharge revenue increased $2.7 million to $4.5 million in the 2003 period
from $1.8 million in the 2002 period. During the 2003 and 2002 periods,
approximately $3.0 million and $1.0 million, respectively, of the fuel surcharge
revenue collected helped to offset Company fuel costs. The remainder was passed
through to independent contractors.
Purchased transportation consists primarily of payments to independent
contractor providers of revenue equipment, expenses related to brokerage
activities, and payments under operating leases of revenue equipment. Purchased
transportation decreased $5.4 million (11.3%), to $42.6 million in the 2003
period from $48.0 million in the 2002 period. As a percentage of revenue,
purchased transportation decreased to 34.2% of revenue in the 2003 period
compared with 37.0% in the 2002 period. These changes reflect a decrease in the
percentage of the fleet supplied by independent contractors and in the number of
independent contractors. Management believes the decline in independent
contractors as a percentage of the Company's fleet is attributable to high fuel
costs, high insurance costs, tighter credit standards, and slow freight demand,
which have diminished the pool of drivers interested in becoming or remaining
independent contractors. The percentage of total operating revenue provided by
independent contractors decreased to 37.8% in the 2003 period from 40.8% in the
2002 period.
Compensation and employee benefits decreased $1.4 million (3.5%), to
$37.9 million in the 2003 period from $39.3 million in the 2002 period. As a
percentage of revenue, compensation and employee benefits remained relatively
constant at 30.4% in the 2003 period compared to 30.3% in the 2002 period.
Decreases in wages paid to non-driver employees resulting from staff reductions
and a decrease in workers' compensation claims paid and reserved were offset by
additional wages paid to new drivers for sign-on bonuses implemented to enhance
driver recruiting and increased health claims and premiums in the 2003 period.
Fuel, supplies, and maintenance increased $1.9 million (9.4%), to $22.4
million in the 2003 period from $20.4 million in the 2002 period. As a
percentage of revenue, fuel, supplies, and maintenance increased to 17.9% of
revenue in the 2003 period compared with 15.8% in the 2002 period. This reflects
an increase in the percentage of the fleet comprised of company owned tractors
and higher fuel prices. Although fuel prices increased approximately 17% to an
average of $1.43 per gallon in the 2003 period from $1.22 per gallon in the 2002
period, the increase in fuel prices was partially offset by a $2.0 million
increase in fuel surcharge revenue which is included in operating revenue.
Insurance and claims decreased $904,000 (17.8%), to $4.2 million in the
2003 period from $5.1 million in the 2002 period. As a percentage of revenue,
insurance and claims decreased to 3.3% of revenue in the 2003 period compared
with 3.9% in the 2002 period, primarily due to a net premium refund of $467,000
for the policy year
14
ended June 30, 2002, upon accepting a $75,000 increase in self-insured retention
for such policy year. The cost of insurance and claims increased substantially
on July 1, 2002, when the Company increased its self-insured retention from
$50,000 to $250,000 per occurrence, without a premium reduction that fully
offset the increase in retention. The higher self-insured retention increases
the Company's risk associated with frequency and severity of accidents and could
increase the Company's expenses or make them more volatile from period to
period. The insurance policies were renewed on July 1, 2003 without modification
to the self-retention level, but the Company's excess insurance coverage limit
was reduced to $2.0 million. Management expects insurance and claims expense, as
a percentage of revenue, will remain at current levels in future periods unless
the Company were to experience an increase in the number or severity of
accidents over the reduced excess policy coverage limit, which could result in a
substantial increase in this expense category as a percentage of revenue.
Taxes and licenses decreased $55,000 (2.1%), to $2.6 million in the
2003 period from $2.6 million in the 2002 period reflecting a decrease in the
weighted average number of tractors in the fleet, partially offset by an
increase in the need for over-dimensional permits. As a percentage of revenue,
taxes and licenses remained relatively constant at 2.1% of revenue in the 2003
compared with 2.0% of revenue in the 2002 period.
General and administrative expenses decreased $364,000 (6.7%), to $5.1
million in the 2003 period from $5.4 million in the 2002 period. As a percentage
of revenue, general and administrative expenses remained relatively constant at
4.1% of revenue in the 2003 period compared with 4.2% of revenue in the 2002
period. During the period, decreases attributable to successful cost cutting
measures and the elimination of commissioned agents at two locations were
partially offset by a $604,000 increase in professional and consulting fees in
the 2003 period.
Communications and utilities decreased $227,000 (16.7%), to $1.1
million in the 2003 period from $1.4 million in the 2002 period reflecting a
decrease in the weighted average number of tractors in the fleet and the closing
of five operating terminals and two maintenance facilities. As a percentage of
revenue, communications and utilities remained relatively constant at 0.9% of
revenue in the 2003 period compared with 1.0% of revenue in the 2002 period.
Depreciation and amortization decreased $1.1 million (9.3%), to $11.0
million in the 2003 period from $12.1 million in the 2002 period. The gain or
loss on retirement, sale, or write-down of equipment is included in depreciation
and amortization. In the 2003 and 2002 period, depreciation and amortization
included net gains from the sale of equipment of $355,000 and $791,000,
respectively. As a percentage of revenue, depreciation and amortization
decreased to 8.8% of revenue in the 2003 period compared with 9.3% of revenue in
the 2002 period because of higher revenue per seated tractor, which more
effectively spread this cost, and a decrease in the number of tractors and
trailers being depreciated.
Interest expense, net, decreased $196,000 (12.6%), to $1.4 million in
the 2003 period from $1.6 million in the 2002 period reflecting lower average
debt outstanding, partially offset by higher interest rates. As a percentage of
revenue, interest expense, net, decreased to 1.1% of revenue in the 2003 period
compared with 1.2% in the 2002 period.
As a result of the foregoing, the Company's pre-tax margin was (2.8%)
in the 2003 period versus (4.8%) in the 2002 period.
The Company's income tax benefit was $1.2 million in the 2003 period,
or 34.4% of loss before income taxes. The Company's income tax benefit in the
2002 period was $2.2 million, or 35.9% of loss before income taxes. In both
periods, the effective tax rate is different from the expected combined tax rate
for a company headquartered in Iowa because of the cost of nondeductible driver
per diem expense absorbed by the Company. The impact of the Company's paying per
diem travel expenses varies depending upon the ratio of drivers to independent
contractors and the level of the Company's pre-tax earnings.
As a result of the factors described above, net loss was $2.3 million
in the 2003 period (1.9% of revenue), compared with net loss of $4.0 million in
the 2002 period (3.0% of revenue).
15
Liquidity and Capital Resources
Uses and Sources of Cash
The Company requires cash to fund working capital requirements and to
service its debt. The Company has historically financed acquisitions of new
equipment with borrowings under installment notes payable to commercial lending
institutions and equipment manufacturers, borrowings under lines of credit, cash
flow from operations, and equipment leases from third-party lessors. The Company
also has obtained a portion of its revenue equipment fleet from independent
contractors who own and operate the equipment, which reduces overall capital
expenditure requirements compared with providing a fleet of entirely company
owned equipment.
The Company's primary sources of liquidity have been funds provided by
operations and borrowings under credit arrangements with financial institutions
and equipment manufacturers. The Company's ability to fund its cash requirements
in future periods will depend on its ability to comply with covenants contained
in financing arrangements, and will require improvement in its operating results
and cash flow. The Company's ability to achieve the required improvements will
depend on general shipping demand of the Company's customers, fuel prices, the
availability of drivers and independent contractors, insurance and claims
experience, and other factors. Management is in the process of implementing
several steps, some of which were developed with the assistance of a consulting
firm engaged by the board of directors, that are intended to improve the
Company's operating results and achieve compliance with the financial covenants.
These steps include: consolidating terminals; improving the utilization per
tractor through a full-time production manager; implementing a yield management
program in which the Company seeks additional favorable freight while ceasing to
haul less favorable freight; and identifying additional areas for cost
containment, including, personnel costs and reducing the Company's excess
insurance coverage limit effective July 1, 2003 to $2.0 million. Although
management believes these steps have helped reduce the Company's losses compared
with the same quarter and nine months in 2002, additional improvement is needed,
and particularly considering seasonally slower shipping demand during the fourth
and first quarters, there is no assurance that the improvements will occur as
planned.
Although there can be no assurance, management believes that cash
generated by operations and available sources of financing for acquisitions of
revenue equipment, although such sources are limited, will be adequate to meet
its currently anticipated working capital requirements and other cash needs
through September 30, 2004. To the extent that actual results or events differ
from management's financial projections or business plans, the Company's
liquidity may be adversely affected. Specifically, the Company's liquidity may
be adversely affected by one or more of the following factors: continuing weak
freight demand or a loss in customer relationships or volume; the ability to
attract and retain sufficient numbers of qualified drivers and owner-operators;
elevated fuel prices and the ability to collect fuel surcharges; costs
associated with insurance and claims; increased exposure with respect to
accident claims as a result of a reduction of the Company's excess insurance
coverage limit; inability to maintain compliance with, or negotiate amendments
to, loan covenants; and the possibility of shortened payment terms by the
Company's suppliers and vendors worried about the Company's ability to meet
payment obligations. The Company expects to fund its cash requirements primarily
with cash generated from operations and revolving borrowings under its bank
financing.
Net cash provided by operating activities was $7.9 million for the nine
months ended September 30, 2003, compared with $6.6 million for the 2002 period.
The increase in net cash provided by operating activities was primarily due to
improved operating results. Historically, the Company's principal use of cash
from operations is to service debt and to internally finance acquisitions of
revenue equipment. Total receivables increased $2.3 million for the nine months
ended September 30, 2003. The average age of the Company's trade accounts
receivable was approximately 33.8 days in the 2002 period and 34.0 days in the
2003 period.
Net cash provided by investing activities was $2.7 million for the nine
months ended September 30, 2003 compared with $3.0 million for the 2002 period.
Such amounts related primarily to sales of revenue equipment and other fixed
assets.
Net cash used in financing activities was $10.6 million for the nine
months ended September 30, 2003 compared with $9.7 million for the 2002 period.
Net cash used in financing primarily consisted of net payments of principal
under the Company's long-term debt agreements.
16
The Company has a financing arrangement with LaSalle Bank, which
expires on January 1, 2005, and provides for automatic month-to-month renewals
under certain conditions. LaSalle may terminate the arrangement prior to January
1, 2005, in the event of default, and may terminate at anytime during the
renewal terms. The arrangement provides for a term loan, a revolving line of
credit, a capital expenditure loan, and financing for letters of credit. The
combination of all loans with LaSalle Bank cannot exceed the lesser of $25.0
million or a specified borrowing base.
At September 30, 2003, the term loan had a principal balance of $10.3
million, payable in equal monthly principal installments of $202,678. The
revolving line of credit allows for borrowings up to 85 percent of eligible
receivables. At September 30, 2003, total borrowings under the revolving line
were $578,000. The capital expenditure loan allows for borrowing up to 80
percent of the purchase price of revenue equipment purchased with such advances,
provided borrowings under the capital expenditure loan are limited to $2.0
million annually, and $4.0 million over the term of the arrangement. At
September 30, 2003, the amount owed under capital expenditure notes was $1.0
million. At September 30, 2003, the Company had outstanding letters of credit
totaling $7.4 million for self-insured amounts under its insurance programs.
These letters of credit directly reduce the amount of potential borrowings
available under the financing arrangement. Any increase in self-insured
retention, as well as increases in claim reserves, may require additional
letters of credit to be posted, which would negatively affect the Company's
liquidity. At September 30, 2003, the Company's borrowing limit under the
financing arrangement was $23.1 million, leaving approximately $3.8 million in
remaining availability at such date.
The Company is required to pay a facility fee on the LaSalle financing
arrangement of .25% of the maximum loan limit. In order to reduce costs, the
maximum loan limit was reduced from $32.5 million to $27.5 million in March
2003, and from $27.5 million to $25.0 million in November 2003, as the Company's
actual borrowing capacity is not expected to exceed $25.0 million. Borrowings
under the arrangement are secured by liens on revenue equipment, accounts
receivable, and certain other assets. In connection with the March 2003
amendment, the interest rate on outstanding borrowings under the arrangement was
increased from LaSalle's prime rate to the prime rate plus two percent.
The LaSalle financing arrangement requires compliance with certain
financial covenants, including compliance with a minimum tangible net worth,
capital expenditure limits, and a fixed charge coverage ratio. The Company was
in compliance with the tangible net worth covenant at September 30, 2003. The
Company was not in compliance with the fixed charge coverage ratio requirement
at September 30, 2003. However, the financing arrangement was amended, which
revised the fixed charge coverage ratio requirement as of September 30, 2003 to
prevent a covenant violation at such date, extended the expiration date of the
agreement to January 1, 2005, adjusted the covenant requirements going forward,
and reduced the maximum loan limit from $27,500 to $25,000. In addition,
equipment financing provided by a manufacturer contains a minimum tangible net
worth requirement. The Company was in compliance with the required minimum
tangible net worth requirement at September 30, 2003. Although there can be no
assurance, management expects to remain in compliance with the various financial
covenants under its financing arrangements going forward. If the Company fails
to maintain compliance with these financial covenants, or to obtain a waiver of
any noncompliance, the lenders will have the right to declare all sums
immediately due and pursue other remedies. In such an event, the Company's
liquidity would be materially and adversely impacted, and the Company's ability
to continue as a going concern could be called into question if alternative
financing could not be found.
17
Contractual Obligations and Commercial Commitments
The following tables set forth the contractual obligations and other
commercial commitments as of September 30, 2003:
Principal Payments Due by Year
(In Thousands)
Less than After
Contractual Obligations Total One year 2-3 years 4-5 years 5 years
------------------------------------------------------------------------------------------------------------------
Long-term debt $36,148 $11,197 $15,598 $9,353 $ -
Line of credit 578 - 578 - -
Operating leases 1,056 351 404 316 88
--------------------------------------------------------------------
Total contractual cash obligations $37,782 $11,548 $16,580 $9,669 $88
====================================================================
The Company had no other commercial commitments at September 30, 2003. Long-term
debt payment dates assume continued compliance with debt covenants.
18
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make decisions based upon estimates, assumptions, and factors it
considers as relevant to the circumstances. Such decisions include the selection
of applicable accounting principles and the use of judgment in their
application, the results of which impact reported amounts and disclosures.
Changes in future economic conditions or other business circumstances may affect
the outcomes of management's estimates and assumptions. Accordingly, actual
results could differ from those anticipated. A summary of the significant
accounting policies followed in preparation of the financial statements included
in this Form 10-Q is contained in Note 1 of the consolidated financial
statements included in the Company's Form 10-K for the year ended December 31,
2002. Other footnotes in the Form 10-K describe various elements of the
financial statements included in this Form 10-Q and the assumptions on which
specific amounts were determined.
The Company's critical accounting policies include the following:
Revenue Recognition
The Company generally recognizes operating revenue when the freight to
be transported has been loaded. The Company operates primarily in the
short-to-medium length haul category of the trucking industry; therefore, the
Company's typical customer delivery is completed one day after pickup.
Accordingly, this method of revenue recognition is not materially different from
recognizing revenue based on completion of delivery. The Company recognizes
operating revenue when the freight is delivered for longer haul loads where
delivery is completed more than one day after pickup. Amounts payable to
independent contractors for purchased transportation, to Company drivers for
wages, and other direct expenses are accrued when the related revenue is
recognized.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided
by use of the straight-line and declining-balance methods over lives of 5 to 39
years for buildings and improvements, 5 years for tractors, 7 years for
trailers, and 3 to 10 years for other equipment. Tires purchased as part of
revenue equipment are capitalized as a cost of the equipment. Replacement tires
are expensed when placed in service. Expenditures for maintenance and minor
repairs are charged to operations, and expenditures for major replacements and
betterments are capitalized. The cost and related accumulated depreciation on
property and equipment retired, traded, or sold are eliminated from the property
accounts at the time of retirement, trade, or sale. The gain or loss on
retirement or sale is included in depreciation and amortization in the
consolidated statements of operation. Gains or losses on trade-ins are included
in the basis of the new asset.
Estimated Liability for Insurance Claims
Losses resulting from auto liability, physical damage, workers'
compensation, and cargo loss and damage are covered by insurance subject to
certain deductibles. Losses resulting from uninsured claims are recognized when
such losses are known and can be estimated. The Company estimates and accrues a
liability for its share of ultimate settlements using all available information.
The Company accrues for claims reported, as well as for claims incurred but not
reported, based upon the Company's past experience. Expenses depend on actual
loss experience and changes in estimates of settlement amounts for open claims
which have not been fully resolved. However, final settlement of these claims
could differ materially from the amounts the Company has accrued at year-end.
Management's judgment concerning the ultimate cost of claims and modification of
initial reserved amounts is an important part of establishing claims reserves,
and is of increasing significance with higher self-insured retention.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net undiscounted cash
flows expected to be generated by the asset. Management's judgment concerning
future cash flows is an important part of this determination. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less the costs to sell. The Company has decided to maintain
its revenue
19
equipment for the foreseeable future and not replace aging tractors. If resale
values remain at current levels or decline, the Company may incur increased
maintenance costs and a lower gain or loss on sale resulting from retaining
equipment even longer.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks from changes in certain interest
rates on its debt. In connection with the March 2003 amendment, the Company's
financing arrangement with LaSalle Bank was amended to provide a variable
interest rate based on LaSalle's prime rate plus two percent, provided there has
been no default. Prior to the amendment the variable interest rate was LaSalle's
prime rate. In addition, approximately $23.3 million of the Company's other debt
carries variable interest rates. This variable interest exposes the Company to
the risk that interest rates may rise. Assuming borrowing levels at September
30, 2003, a one-point increase in the prime rate would increase annual interest
expense by approximately $352,000. The remainder of the Company's other debt
carries fixed interest rates and exposes the Company to the risk that interest
rates may fall. At September 30, 2003, approximately 96% of the Company's debt
carries a variable interest rate and the remainder is fixed.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Exchange Act, the Company has
carried out an evaluation of the effectiveness of the design and operation of
the Company's disclosure controls and procedures as of the end of the period
covered by this report. This evaluation was carried out under the supervision
and with the participation of the Company's management, including its Chief
Executive Officer and its Chief Financial Officer. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
controls and procedures were effective as of the end of the period covered by
this report. There were no changes in our internal control over financial
reporting that occurred during the period covered by this report that have
materially affected or that are reasonably likely to materially affect the
Company's internal control over financial reporting.
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer as appropriate, to allow timely decisions regarding
disclosures.
The Company has confidence in its internal controls and procedures.
Nevertheless, the Company's management, including the Chief Executive Officer
and Chief Financial Officer, does not expect that our disclosure procedures and
controls or our internal controls will prevent all errors or intentional fraud.
An internal control system, no matter how well-conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of such
internal controls are met. Further, the design of an internal control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all internal control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected.
20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No reportable events or material changes occurred during the quarter
for which this report is filed.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company's financing arrangement with LaSalle Bank requires
compliance with certain financial covenants, including compliance with a minimum
tangible net worth, capital expenditure limits, and a fixed charge coverage
ratio. The Company was in compliance with the tangible net worth covenant at
September 30, 2003. The Company was not in compliance with the fixed charge
coverage ratio requirement at September 30, 2003. However, the financing
arrangement was amended, which revised the fixed charge coverage ratio
requirement as of September 30, 2003 to prevent a covenant violation at such
date, extended the expiration date of the agreement to January 1, 2005, adjusted
the covenant requirements going forward, and reduced the maximum loan limit from
$27,500 to $25,000. Although there can be no assurance, management expects to
remain in compliance with the various financial covenants under its financing
arrangements going forward. If the Company fails to maintain compliance with
these financial covenants, or to obtain a waiver of any noncompliance, the
lenders will have the right to declare all sums immediately due and pursue other
remedies. In such an event, the Company's liquidity would be materially and
adversely impacted, and the Company's ability to continue as a going concern
could be called into question if alternative financing could not be found.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
3.1 * Articles of Incorporation.
3.2 * Bylaws.
4.1 * Articles of Incorporation.
4.2 * Bylaws.
10.16 # Sixth Amendment to Amended and Restated Loan and Security Agreement dated July 31,
2003, between LaSalle Bank National Association, Smithway Motor Xpress, Inc., as
Borrower, and East West Motor Express, Inc., as Borrower.
31.1 # Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, by William G. Smith, the Company's Chief
Executive Officer
31.2 # Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, by G. Larry Owens, the Company's Chief
Financial Officer
32.1 # Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, by William G. Smith, the Company's Chief Executive
Officer
32.2 # Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, by G. Larry Owens, the Company's Chief Financial Officer
- --------------------------
* Incorporated by reference from the Company's Registration Statement on Form S-1, Registration No. 33-90356,
effective June 27, 1996.
# Filed herewith.
(b) Reports on Form 8-K.
During the quarter ended September 30, 2003, the Company filed with, or furnished to, the Securities and Exchange
Commission (the "Commission") the following Current Report on Form 8-K:
Current Report on Form 8-K dated August 1, 2003 (filed with the Commission on August 8, 2003) reporting the Company's
issuance of a press release to announce financial and operating results for the quarter ended June 30, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SMITHWAY MOTOR XPRESS CORP.
Date: November 13, 2003 By: /s/ G. Larry Owens
---------------------------------------
G. Larry Owens
Executive Vice President, Chief Administrative
Officer, and Chief Financial Officer, in his
capacity as such and on behalf of the issuer
23